Currency Swap

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DEFINITION of 'Currency Swap'

A swap that involves the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company's balance sheet.

INVESTOPEDIA EXPLAINS 'Currency Swap'

For example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange.

Currency swaps were originally done to get around exchange controls.

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RELATED FAQS
  1. How do currency swaps work?

    A currency swap, also known as a cross-currency swap, is an off-balance sheet transaction in which two parties exchange principal ... Read Full Answer >>
  2. How does the foreign-exchange market trade 24 hours a day?

    The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex ... Read Full Answer >>
  3. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Full Answer >>
  4. Is a person registered for Financial Instruments Business eligible to conduct both ...

    A person in the financial instruments business, as defined by the Financial Instruments and Exchange Law, is allowed to engage ... Read Full Answer >>
  5. How are swap agreements financed?

    Since swap agreements involve the exchange of future cash flows and are initially set at zero, there is no real financing ... Read Full Answer >>
  6. What are the risks involved with swaps?

    The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty ... Read Full Answer >>
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